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semiconductor designer Nvidia (NVDA 3.06%) It has created many millionaires in recent years. The company’s stock price has more than tripled in the last year alone. Now, among stocks with a market cap of at least $50 billion, Nvidia has completely outperformed all others over the past three, five, and 10 years. These days, it’s hard to beat this wealth creation machine.
So what’s next? Let’s say you scooped up his $20,000 Nvidia position today. Can you expect a return of $1 million on that investment?
The simple answer is yes, but it takes time and doesn’t guarantee lofty results.
NVIDIA reflected in the rearview mirror
Looking back, Nvidia’s stock price chart over the past eight years has been nothing short of extraordinary. The company’s strategy, which launched in 2016 with a substantial market capitalization of $23 billion, has changed with market opportunities.
Nvidia’s expertise in high-performance graphics cards for gaming and professional graphics became a crypto bonanza as enthusiasts realized the same cards were better at mining. Ethereum (Ethereum 0.47%) token. Just as Ethereum switched to another technology that didn’t require miners, OpenAI emerged with his ChatGPT tool, revealing a new dawn of generative artificial intelligence (AI). Nvidia’s AI accelerator processor, based on the same high-end graphics platform that powers the proliferation of games and cryptocurrencies, powered the backend creation of ChatGPT’s AI engine.
Many companies with AI ambitions are currently purchasing hundreds or even thousands of very expensive accelerator chips, and the first supplier that comes to mind at the moment is Nvidia. That’s reflected in Nvidia’s impressive financial results and stock price chart below.
NVDA data by YCharts
The graph above shows the return on a $20,000 investment started on May 16, 2016, which is now worth $1 million approximately 8 years later. This is an average annual return of 67.4%.
road ahead
At the end of the market-shattering chart, Nvidia will be worth $1.4 trillion. By delivering top-notch products at the right time and in line with the right market opportunities, the stock price has risen to these heights through a difficult path. The result is a legendary price rally that delivers record investor returns. If you break down the overall stock market returns over a 10-year period, you don’t even need to limit the sector with large market capitalization requirements to weed out short-lived meme stocks and other horseflies. Nvidia simply offered the strongest 10-year return of any stock tracked by the screeners at my disposal.
But things are different now. A $23 billion market cap might be tough for him to grow 50 times, but it gets even harder when you start with a $1.3 trillion equity value footprint. He assumes the company’s average annual return is 67%, even if Nvidia continues to dominate his AI market and its trends make his most shocking predictions come true for years to come. is unrealistic. another 8 years of running.
By the end of that rainbow, Nvidia will be worth $67.6 trillion. This equates to more than double his gross domestic product (GDP) of the United States, which in 2023 is estimated at $26.9 billion. Sorry, it will take a while.
Balancing business growth and shareholder benefits
Nvidia’s past performance sets a high bar, and it’s important to manage expectations for the next phase of the AI business. The exceptional gains of recent years are unlikely to continue for another eight years.This will require not only nearly a full decade of continued success in the rapidly growing field of AI, but also sustained hypergrowth of the market itself. and Investors’ confidence in Nvidia’s high valuation ratio is unwavering. The company currently trades at a P/E ratio of 72 times and sales of 30 times. These overheated ratios should subside over time, increasing the financial support needed for its $67 trillion market cap in the process.
Of course, Nvidia could use some accounting tricks to lower the bar. The company is able to return cash to shareholders through generous share buybacks and dividends.
Other companies have pursued this strategy before. for example, international office machine (IBM 0.70%) Over the past decade, the stock price has fallen 2% and the market capitalization has shrunk by 14%. At the same time, Big Blue bought back his 12% of outstanding shares and paid a solid dividend. Overall, the IBM investor earned a substantial total return of 50% over the same period.
Nvidia could try a large-scale version of this, increasing its bottom line by sharing cash profits with its investors. Of course, there is a fine line between generosity and blunders that slow growth, as this cash-sharing idea would take away the company’s freedom to invest in business plans that will drive future growth.
And of course, anything is possible over a long enough period of time. America’s GDP stopped at $1.5 trillion in 1973, which is comparable to NVIDIA’s market value today. The idea that a single company could be worth $1 trillion in market capitalization would have sounded ridiculous 50 years ago, but here we stand by his six stocks from the $1 trillion club. ing. A few decades from now, the $67 trillion goal may not be so crazy.
The real question is, will NVIDIA still be around in 2064 or 2074, and will it continue to dominate its chosen markets over that period? I don’t think so, but anything is possible.
A realistic approach to investing in Nvidia
Sure, Nvidia may be able to grow a $20,000 investment into $1 million, but the road to that ambitious goal is long, and many things can go wrong along the way. Remember, this stock has delivered the richest shareholder returns of any company over the past decade, but even that impressive performance barely exceeds the 50 times earnings needed to achieve that goal. Is not …
That being said, I don’t plan on exiting my Nvidia position anytime soon, but I might take advantage of the recent moonshot by spreading some of the gains into other investment ideas. I still think the established AI giant has a bright future, and that valuation has softened a bit in recent weeks. If you can stomach trading at nosebleed prices, it makes perfect sense to buy Nvidia stock now. The next wave of orders for processors for AI systems could make the previous surge forgettable by comparison.
Invest in Nvidia today. Don’t expect the incredible gains of the past eight years to continue for multiple more years. To make me a happy Nvidia investor, all the company needs to do is deliver a stock price increase that is equal to or greater than the overall stock market.
At 15% per year, you’ll have a 50x return after 28 years. Dear reader, patience is a virtue.
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